From the March 2004 issue of Investment Advisor • Subscribe!

Struggle for Survivorship

Sales of second-to-die insurance are down, for obvious reasons. But the policies might make sense for less obvious reasons

Lately, trying to sell survivorship life insurance has been like trying to sell a rain poncho on a cloudless day--sure, people may need it someday, but it would be a lot easier to move merchandise if the need seemed a little more pressing. Survivorship, or second-to-die, life insurance has traditionally been sold for one reason--to pay the estate taxes due at the death of the second spouse--and anyone with an estate expected to exceed the estate tax exemption amount was a reasonable candidate. Today, however, the sales pitch has lost much of its punch: "Well, Mr. and Mrs. Client, I'm not exactly sure what the estate tax exemption is going to be in any given year, since it's going to stair-step up until 2009, and disappear entirely in 2010. It's supposed to reappear again in 2011, but to tell you the truth, I'm not exactly sure about that, either. You should probably wait and see, but wouldn't you like to buy a survivorship policy today, anyway, in order to pay the estate taxes that you might never owe?"

It's a tough sell, agrees John Ryan of Ryan Insurance Strategy Consultants in Greenwood Village, Colorado, an insurance firm specializing in serving fee-only advisors. "I'd venture to say that 80%-90% of survivorship insurance is sold for estate liquidity purposes," he says. "I've got friends in Denver whose practices were 70% survivorship life sales, and they're struggling."

Indeed, survivorship life sales have faltered throughout the industry, says Les Lovier, VP of product development at AXA Financial in New York City. "It's been picking up a little bit very recently, but generally, business has been poor, and I think that's true industry-wide," he says. "In many cases, people are waiting to see whether estate taxes are repealed or not." As a result, some companies are scaling back their research and development on new survivorship products, preferring to wait until (or if) sales improve. "Nearly all the major companies still offer [survivorship] products," says Lovier, "but they're not necessarily designing as many new ones, because sales aren't at the level they once were."

True, there can be other reasons that clients should buy survivorship life, and Paul Mason, VP of marketing for Jefferson Pilot Financial in Greensboro, North Carolina, says that "the specter of possible estate tax repeal has shifted the focus of producers to other, equally strong uses of second-to-die coverage." But you're likely to run into trouble if you start off with survivorship as the solution, and go around looking for problems it can solve: The fact that you only sell hammers is no excuse for selling a hammer to someone who really needs a paintbrush. "Sometimes we as an industry have one solution in our minds when we go in to talk to someone, and we don't present Plan B and Plan C to them, when in fact [those options] might be better for them in the long run," says Ryan. "But there's always two ways to skin a cat."

As a general rule, says Ryan, if someone needs insurance for more than 30 years, permanent insurance may be the right thing for them; if their need is 30 years or less, term insurance is probably required. And when in doubt, err on the side of term insurance, he says. "Let's say you have a 40-year-old whose estate taxes on his $20 million estate will be due in 50 years. You probably wouldn't use term insurance to solve that problem [because the insurance is needed for more than 30 years], but the 40-year-old might just say, 'Hey, I'll buy a 30-year level term policy for my millions, and if after 30 years I still feel that my estate is in jeopardy, I'll convertto a permanent product at that point,'" he says. "It's the wait-and-see approach: Buying term with the option to convert."

Bearing in mind Ryan's advice about multiple ways to skin a cat, let's look at the other uses for survivorship life insurance. Most people agree that it's an excellent way to provide for the care of a special-needs child where the child could be cared for by either parent, but would be in dire straits if both parents were gone; Mason of Jefferson Pilot Financial adds that it can be similarly used to care for a dependent elderly parent. Survivorship can be used to equalize inheritances where some of the children will be inheriting a family business and others will not, and it can also enable a couple to make a large charitable gift at the death of the second spouse. ("Although I would rather see people make the gift now, and see them enjoy the kudos that come with being a benefactor," says Ryan. "Get the tickets on the 50-yard line, or the box seats at the symphony: Buy a term policy [for a smaller gift after your deaths], and start giving [the difference] to the organization today.") Another use for the product is to help heirs pay capital gains on inherited assets if the step-up in basis at the death of the owner disappears along with the estate tax, but this argument has less urgency than the threat of estate taxes once did. "The force behind second-to-die has always been estate liquidity, because the IRS was going to come after your estate in nine months and demand their money," says Ryan. "Whereas with a capital gains situation, the heirs have the luxury of selling or not selling, and they have as much time as they want to decide."

If you do choose to recommend a survivorship product to your client, look for a no-lapse premium guarantee, and blend term insurance with permanent insurance when designing the policy, advises Ryan. And consider a guaranteed death benefit to age 100 regardless of what happens to interest rates, says Lovier. What's more, if your client is buying the policy to cover estate taxes, take a look at a rider that would waive surrender charges if the estate tax is repealed in 2011 and later. Several insurers, including Lovier's company, AXA Financial, now offer such a rider, and "it's been a very popular feature," he says.

Assistant Managing Editor Karen Hansen Weese can be reached at khansen@ia-mag.com.

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